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Wednesday, January 22, 2014

The Importance of Keeping Your Business Books Up-To-Date

Peter King
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At least once a month, you should be doing an analysis of your business, and making sure that your books and records are in working order.

It's  not only good to see the progression of your business, but to verify that both your accounts payables and receivables are in the black. If you are thinking about selling your business somewhere down the line, you should have everything in shape. Additionally, you should have dashboard reports that pinpoint exactly where your revenues are coming from (or not) along  with industry analysis reports that show how your business stands up  against others.

Specifically, you should be paying attention to profit and loss statements (P&Ls) when analyzing  your business. You'll be able to account for all the income that your business has earned as well  as all incurred expenses.

There are two ways to cast a P&L:

1. For tax purposes, a P&L is slanted to show maximum expenses and minimum profit.  

2. To help sell your business for top dollar, the P&L is re-casted to show the actual ongoing  business expenses and maximum profit.

Remember, buyers are looking for a business that's making a profit. So when reconstructing the  P&L statement, pull out the personal expenses, overstated inventory, non-deductable expenses,  owner's personal insurance, salary, promotion expenditures, travel and entertainment, depreciation on equipment, auto expenses, bad debt, donations, interest and income tax. Once  you remove these items from the "losses" category, the money gets added to the "profits"  category. Now, you should be left with a truer net profit.

Realistically, you should have in order the last three years of P&Ls, especially, if you are selling  your business. You can prove to the buyer that your business is worth your asking price.  Establish a record of steady profitability as well that will help you see not only how your business is progressing, but can show a potential buyer that it is a proven money maker. Most buyers are  looking for a well-run operation that is efficient. You can show this by having accurate and timely  bookkeeping records.

An important aspect to inventory is all your furniture, fixtures and equipment. In addition, note  which items are leased or rented. If you're preparing to sell, you are going to want to make a  complete list of everything that is included in the price.

For example, many potential buyers will assume that when they tour an establishment,  everything they see is included at no additional cost. Therefore, you want to have a separate list  that describes everything that is being rented, leased or will not automatically be included.

There have been instances where the seller neglected to include an outside sign on the property that he was  leasing for $350 a month. As a result, the sale ended altogether at the closing table.
It cannot be stressed enough that you need to keep good business records, regardless if you  plan to be in business for several years or sell within the near future to a prospective buyer.  Knowing what your value is will only help you in the long run.    


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